Thursday, February 05, 2009

An Introduction to the Employer of Last Resort Proposal

A New WPA?

by Ryan A Dodd

Dollars & Sense magazine (March / April 2008)

Dark clouds are now looming over America's economic future. As first the stock market boom and then the housing boom have come to an end, along with the fountains of cheap credit that were their mainspring, the perennial gale of unemployment is blowing in. The president and Congress have addressed the downturn with tax rebates and talk of "debt relief". Meanwhile, public infrastructure is crumbling. Workers' wages are stagnating while their work hours are rising. Health insurance is becoming less and less affordable for the typical family. And as US military spending escalates, government spending on essential services is drastically reduced.

All of these facts serve to remind us that capitalist economies are inherently unstable and structurally incapable of creating full employment at decent wages and benefits. While tax rebates and debt relief may provide some minor protection from the coming economic storm, these measures are temporary - and inadequate - responses to a perpetual problem. As an alternative to these ad hoc policies or, worse yet, the free-market fundamentalism still widely preached in Washington, some economists and policymakers, in the United States and abroad, are touting a policy that seeks to end unemployment via a government promise to provide a job to anyone ready, willing, and able to work.

Argentina's Experiment in Direct Job Creation

In early December 2001, following nearly two decades of neoliberal restructuring, the Argentine economy collapsed. Apparently, two decades of privatization, liberalization, and government austerity, ushered in by Argentina's brutal military junta (in power from 1976 to 1983), were not enough to sate the appetites of global financial capital: earlier that year the International Monetary Fund had withheld $1.3 billion in loans the country needed to service its $142 billion external debt. In response to the IMF's action, the government froze all bank accounts (although many wealthy Argentines managed to relocate their funds abroad before the freeze) and drastically cut government spending. As a consequence, the economy experienced a severe depression as incomes and expenditures fell through the floor. The unemployment rate shot up to a record 21.5% by May 2002, with over fifty percent of the population living in poverty. The popular response to the crisis was massive. Protests and demonstrations erupted throughout the country. The government went through five presidents in the course of a month. Workers eventually reclaimed dozens of abandoned factories and created democratically run cooperative enterprises, many of which are still in operation today and are part of a growing co-op movement.

Reclaiming factories was a lengthy and difficult process, however, and the immediate problem of unemployment remained. In response, in April 2002 the Argentine government put into place a direct job creation program known as Plan Jefes de Hogar ("Heads-of-Household Plan"), which promised a job to all heads of households satisfying certain requirements. In order to qualify, a household had to include a child under the age of eighteen, a person with a disability, or a pregnant woman; the household head had to be unemployed; and each household was generally limited to only one participant in the program. The program provided households with 150 pesos a month for four hours of work a day, five days a week. Program participants mainly engaged in the provision of community services and/or participated in worker training programs administered by local nonprofits.

While limited in scope and viewed by many in the government as an emergency measure, the program was incredibly successful and popular with its workers. It provided jobs and incomes to roughly two million workers, or thirteen percent of Argentina's labor force, as well as desperately needed goods and services - from community gardens to small construction projects - to severely depressed neighborhoods. The entry of many women into the program, while their husbands continued to look for jobs in the private sector, had a liberating effect on traditional family structures. And by some accounts, the program helped facilitate the cooperative movement that subsequently emerged with the takeover of abandoned factories. Not surprisingly, as Argentina's economy has recovered from the depths of the crisis, the government has recently made moves to discontinue this critical experiment in direct job creation.

"Employer of Last Resort"

The Argentine experience with direct job creation represents a real-world example of what is often referred to as the employer of last resort (ELR) proposal by a number of left academics and public policy advocates. Developed over the course of the past two decades, the ELR proposal is based on a rather simple idea. In a capitalist economy, with most people dependent on private employment for their livelihoods, the government has a unique responsibility to guarantee full employment. This responsibility has been affirmed in the UN Universal Declaration of Human Rights, which includes a right to employment. A commitment to full employment is also official US government policy as codified in the Employment Act of 1946 and the Humphrey-Hawkins Act of 1976.

Although many versions of the ELR proposal have been put forward, they all revolve around the idea that national governments could guarantee full employment by providing a job to anyone ready, willing, and able to work. The various proposals differ mainly on the wage and benefit packages they would provide to participants. The most common proposal calls for paying all participants a universal basic wage and benefit package, regardless of skills, work experience, or prior earnings. This wage and benefit package would then form the effective minimum for both the public and private sectors of the economy. After fixing a wage and benefit package, the government would allow the quantity of workers in the program to float, rising and falling in response to cyclical fluctuations in private-sector employment.

As with Argentina's program, ELR proposals typically call for participants to work in projects to improve their local communities - everything from basic infrastructure projects to a Green Jobs Corps. Most ELR proponents also advocate a decentralized approach similar to Argentina's, with local public or nonprofit institutions planning and administering the projects, though it is essential that the program be funded at the national level.

This raises an important question: How will governments pay for such a large-scale program? Wouldn't an ELR program require significantly raising taxes or else result in exploding budget deficits? Can governments really afford to employ everyone who wants a job but cannot find one in the private economy? Advocates of ELR address the issue of affordability in different ways, but all agree that the benefits to society vastly outweigh the expense. Many ELR advocates go even further, arguing that any talk of "costs" to society misrepresents the nature of the problem of unemployment. The existence of unemployed workers represents a net cost to society, in terms of lost income and production as well as the psychological and social stresses that result from long spells of unemployment. Employing them represents a net benefit, in terms of increased incomes and enhanced individual and social wellbeing. The real burden of an ELR program, from the perspective of society, is thus effectively zero.

Most estimates of the direct cost of an ELR program are in the range of less than one percent of GDP per year. For the United States, this was less than $132 billion in 2006, or about five percent of the federal budget. (By way of comparison, in 2006 the US government spent over $120 billion on the wars in Iraq and Afghanistan - and that figure does not include the cost of lives lost or ruined or the future costs incurred, for example, for veterans' health care.) Furthermore, an ELR program provides benefits to society in the form of worker retraining, enhanced public infrastructure, and increased social output (for example, cleaner parks and cities, free child care, public performances, et cetera). By increasing the productivity of those participants who attend education or training programs, an ELR program would also decrease real costs throughout the economy. Estimates of program costs take into account a reduction in other forms of social assistance such as food stamps, cash assistance, and unemployment insurance, which would instead be provided to ELR participants in the form of a wage and benefit package. Of course, those who cannot work would still be eligible for these and other forms of assistance.

Today, the ELR idea is mostly confined to academic journals and conferences. Still, proponents can point to a number of little known real-world examples their discussions have helped to shape. For example, the Argentine government explicitly based its Jefes de Hogar program on the work of economists associated with the Center for Full Employment and Price Stability (CFEPS) at the University of Missouri-Kansas City. Daniel Kostzer, an economist at the Argentine Ministry of Labor and one of the main architects of the program, had become familiar with the CFEPS proposal and was attempting to create such a program in Argentina a few years before the collapse provided him with the necessary political support. Similar experiments are being considered or are currently underway in India, France, and Bolivia. Advocates of ELR proposals can also be found at the Levy Economics Institute (US), the Center for Full Employment and Equity (Australia), and the National Jobs for All Coalition (US).

The Case for Direct Job Creation

Involuntary unemployment is a fundamental and inherent feature of a capitalist economy left to its own devices. In a society where most people depend on employment in the private sector for their livelihood, the inability of a capitalist economy to consistently create enough jobs for all who seek work is deeply troubling, pointing to the need for intervention from outside of the private sector. ELR advocates view national governments - with their unique spending ability, and with their role as, in principle, democratically accountable social institutions - as the most logical institutions for collective action to bring about full employment. In addition, government job creation is viewed as the simplest and most direct means for overcoming the problem of involuntary unemployment in a capitalist economy.

The standard mainstream response to the problem of unemployment is to blame the victims of capitalism for lacking the necessary talents, skills, and effort to get and keep a job. Hence, the mainstream prescription is to promote policies aimed at enhancing the "human capital" of workers in order to make them more "competitive" in a rapidly globalizing economy. The response of ELR advocates is that such policies, if they accomplish anything at all, simply redistribute unemployment and poverty more equitably. For example, according to the Bureau of Labor Statistics, the number of unemployed workers (including so-called "discouraged" and "underemployed" workers) in August 2007 was 16.4 million, while the number of job vacancies was 4.1 million. No amount of investment in human capital is going to change the fact that there simply aren't enough jobs to go around.

Advocates of ELR also consistently reject the Keynesian rubric, with its focus on demand-management strategies - that is, policies aimed at increasing aggregate demand for the output of the economy. This approach has been pursued either directly, through government spending on goods and services (including transfer payments to households), or indirectly, largely through policies intended to increase private investment. Such an approach exacerbates inequality by biasing policy in favor of the already well-to-do, through tax cuts and investment credits to wealthy individuals and powerful corporations. These policies also tend to privilege the more highly skilled and better-paid workers found in the industries that generally benefit from the government's largesse (often arms manufacturers and other military-related companies). For example, much of the increase in government spending during the Cold War era went into the high-tech, capital-intensive, and oligopolized sectors of the economy. Capital-intensive industries require relatively small amounts of labor, and, thus, produce little employment growth per dollar of government expenditure. Under this policy approach, the most that lower-paid or unemployed workers could hope for would be to snatch a few crumbs from the great corporate feast as the economy expanded over time.

In contrast to both the human-capital and demand-management approaches, ELR provides a means for rapidly achieving zero involuntary unemployment. By definition, anyone who is unemployed and chooses not to accept the ELR offer would be considered voluntarily unemployed. Many individuals with sufficient savings and decent job prospects may forgo the opportunity to participate in the ELR program, but ELR always provides them with a backup option.

In addition to the immediate effects of ELR on employment, the program acts as an "automatic stabilizer" in the face of cyclical fluctuations in the private sector of the economy. During a recession, the number of participants in the program can be expected to grow as people are laid off and/or find it increasingly difficult to find private-sector employment. The opposite happens during the recovery phase of the business cycle, as people find it easer to find private-sector employment at wages above the ELR minimum. As a result, ELR advocates argue, the existence of such a program would dampen fluctuations in private-sector activity by setting a floor to the decline in incomes and employment.

A final and less discussed benefit of the program is its socializing effect. The example of Argentina is instructive in this respect. The nature of employment in the Jefes program, oriented as it was toward community rather than market imperatives, created a sense of public involvement and responsibility. Participants reported increases in morale and often continued to work beyond the four hours a day for which they were getting paid; they appreciated the cooperative nature of most of the enterprises and their focus on meeting essential community needs as opposed to quarterly profit targets. By expanding the public sphere, the Jefes program created a spirit of democratic participation in the affairs of the community, unmediated by the impersonal relations of market exchange. These are the kinds of experiences that are essential if capitalist societies are to move beyond the tyranny of the market and toward more cooperative and democratic forms of social organization.

Some economists and advocates have pressed for a similar proposal, the basic income guarantee (BIG). Instead of guaranteeing jobs, under this proposal the government would guarantee a minimum income to everyone by simply giving cash assistance to anyone earning below that level, in an amount equal to the gap between his or her actual income and the established basic income. (Hence this proposal is sometimes referred to as a "negative income tax".) BIG is an important idea deserving wider discussion than it has so far received. But ELR advocates have a number of concerns. One is that a BIG program is inherently inflationary: by providing income without putting people to work, it creates an additional claim on output without directly increasing the production of that output. Another is that BIG programs are less politically palatable - and hence less sustainable - than ELR schemes, which benefit society at large through the provision of public works and other social goods, and which avoid the stigma attached to "welfare" programs. Finally, a job offers social and psychological benefits that an income payment alone does not: maintaining and enhancing work skills, keeping in contact with others, and having the satisfaction of contributing to society. When, for instance, participants in Argentina's Jefes program were offered an income in place of a job, most refused; they preferred to work. Consequently, ELR programs meet the same objectives as basic income guarantee schemes and more, without the negative side effects of inflation and stigmatization. Nonetheless, a BIG program may be appropriate for those who should not be expected to work.

Learning from the Past

The idea that the government in a capitalist economy should provide jobs for the unemployed is not new. In the United States, the various New Deal agencies created during the Great Depression of the 1930s offer a well-known example. Organizations such as the Works Progress Administration and the Civilian Conservation Corps were designed to deal with the massive unemployment of that period. Unemployment peaked at almost 25% of the civilian labor force in 1933 and averaged over seventeen percent for the entire decade. These programs were woefully inadequate, largely due to their limited scale. It ultimately took the massive increases in government expenditure precipitated by the Second World War to pull the US economy out of depression.

The onset of the postwar "Golden Age" and the dominance of Keynesian economics sounded the death knell of direct job creation as a solution to unemployment. The interwar public employment strategy was replaced with a "demand-management" strategy - essentially a sort of trickle-down economics in which various tax incentives and government expenditure programs, mainly military spending, were used to stimulate private investment. Policymakers believed that this would spur economic growth. The twin problems of poverty and unemployment would then be eliminated since, according to President Kennedy's famous aphorism, "a rising tide lifts all boats".

In the mid-1960s, the civil rights movement revived the idea of direct job creation as a solution to the problems of poverty and unemployment. Although the Kennedy and Johnson administrations had declared a so-called War on Poverty, the movement's call for direct job creation fell on deaf ears as the Johnson administration, at the behest of its Council of Economic Advisers, pursued a more conservative approach based on the standard combination of supply-side incentives to increase private investment and assorted strategies to "improve" workers' "human capital" so as to make them more attractive to private employers. The rise to dominance of neoliberalism since the mid-1970s has resulted in a full-scale retreat from even the mildly social democratic policies of the early postwar period. While a commitment to full employment remains official US economic policy, the concerns of central bankers and financial capitalists now rule the roost in government circles. This translates into a single-minded obsession with fighting inflation at the expense of all other economic and social objectives. Not only is fighting inflation seemingly the only concern of economic policy, it is seen to be in direct conflict with the goal of full employment (witness the widespread acceptance among economists and policymakers of the NAIRU, or "non-accelerating inflation rate of unemployment" theory, which posits that the economy has a set-point for unemployment, well above zero, below which rapidly rising inflation must occur). Whenever falling unemployment leads to concerns about "excessive" wage growth, central banks are expected to raise interest rates in an attempt to force slack on the economy and thereby decrease inflationary pressures. The resulting unemployment acts as a kind of discipline, tempering the demands of working-class people for higher wages or better working conditions in favor of the interests of large commercial and financial institutions. The postwar commitment to full employment has finally been sacrificed on the altar of price stability.

ELR and Capitalism

As demonstrated by the history of public employment programs in the United States and the example of Argentina, direct job-creation programs do not happen absent significant political pressure from below. This is the case whether or not those calling for change explicitly demand an ELR program. Given the hegemonic position of neoliberal ideology, there are many powerful forces today that would be hostile to the idea of governments directly creating jobs for the unemployed. These forces represent a critical barrier to the implementation of an ELR program. In fact, these forces represent a critical barrier to virtually any project for greater social and economic justice. The purpose of initiating a wider discussion of ELR proposals is to build them into more comprehensive programs for social and economic justice. As is always the case, this requires the building of mass-based social movements advocating for these and other progressive policies.

A significant objection to the ELR proposal remains: it's capitalism, stupid. If you don't like unemployment, poverty, and inequality - not to mention war, environmental destruction, and alienating and exploitative work - then you don't like capitalism, and you should seek alternatives instead of reformist employment policies. ELR advocates would not disagree. In the face of the overlapping and myriad problems afflicting a capitalist economy, the achievements of even a full-scale ELR program would be limited. The political difficulties involved in establishing an ELR program in the first place, in the face of opposition from powerful elements of society, would be immense. And certainly, the many experiments in non-capitalist forms of economic and social organization currently being carried out, for example, in the factories of Argentina and elsewhere, should be championed. But it is fair to ask: shouldn't we also champion living wage laws, a stronger social safety net for those who cannot or should not be expected to work, and universal health care - as well as an end to imperialist wars of aggression, environmentally unsustainable practices, and the degradation of work? In sum, shouldn't we seek to alleviate the symptoms of capitalism, even as we work toward a better economic system?

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Ryan A. Dodd is a PhD student in economics and a research associate at the Center for Full Employment and Price Stability, both at the University of Missouri-Kansas City.

Sources: Joseph Halevi, "The Argentine Crisis", Monthly Review (April 2002); Pavlina Tcherneva, "Macroeconomic Stabilization Policy in Argentina: A Case Study of the 2002 Currency Collapse and Crisis Resolution through Job Creation" (Bard College Working Paper, 2007); L Randall Wray, Understanding Modern Money: The Key to Full Employment and Price Stability (Edward Elgar, 1998); Congressional Research Service, The Cost of Iraq, Afghanistan and Other Global War on Terror Operations Since 9/11, updated 7/07; National Jobs for All Coalition, September 2007 Unemployment Data; Nancy Rose, "Historicizing Government Work Programs: A Spectrum from Workfare to Fair Work" (Center for Full Employment and Price Stability, Seminar Paper No 2, March 2000); Judith Russell, Economics, Bureaucracy and Race: How Keynesians Misguided the War on Poverty (Columbia University Press, 2004); Fadhel Kaboub, "Employment Guarantee Programs: A Survey of Theories and Policy Experiences" (Levy Economics Institute, Working Paper No 498, May 2007).

2 Comments:

your blog is very nice blog .

Tourism in India is bound to be as it provides incredible doubled consolation to travelers around the world in one form or another. This may be the attraction of spiritualism, the incredible culture, cuisine, history and geography!

There are infinitely excursions and tourism opportunities in this fascinating country of India's incredible.

But I don’t agree that bumping up demand (via Keynsian or monetarist methods) particularly benefits the better off. Any evidence to back this?

Seems to me there one section right at the bottom benefits enormously Keynsian (or monetarist) demand boosting measures, namely the unemployed.

What do you think the 5 million or so Americans thrown out of work in the 2008-9 recession want: do you think they want normal factory or office jobs paying union wages, or do you think they want Jefes type schemes offering part time work at around the legal minimum per hour?

By the way, the above bit of spam from the Indian needs deleting, doesn’t it?